class: center, middle, inverse, title-slide # Unemployment and Inflation ## Week 9 ### Krisna Gupta ### 05 April 2021 (updated: 2021-04-05) --- ## Last Week - Various Indicators ## This week and next week - Unemployment rate - Inflation - Long run growth --- class: middle, center # Unemployment rate --- ## Unemployment rate: Definition - Unemployment rate is NOT simply the rate of how many people without a job in a country. - The important part is the divider: instead of dividing unemployed people with total population, we divide it with a **labour force** .s[ `$$\text{unemployment rate}=\frac{\text{Number of unemployed workers}}{\text{Labour Force}} \times 100\%$$` ] --- ## Labour Force - **labour force** is the sum of people who are **currently working** and people who are **looking for work**. - Unemployment rate in Indonesia is calculated by BPS. You can read the definition [on their website](https://www.bps.go.id/subject/6/tenaga-kerja.html#subjekViewTab1). - You need to be above 15 years old to be included in the labour force. - **Currently working**: doing activities which receive payment or profit for at least 1 hour in 1 week. --- ## More definition - **looking for work** is someone who are not working but reporting as looking for work in the last one week. - **part-time employed** is someone who are doing work less than 35 hours a week and is **not** looking for a full-time work. - **underemployed** is someone who are doing work less than 35 hours a week and is looking for a full-time work but unable to find one (mostly due to economic condition). --- --- ## labour force & participation rate Labour force excludes: 1. 15 years old or younger. 1. School and university goers. 1. Retiree. 1. stay-at-home mum/dad. - Labour participation rate is defined as: .s[$$\text{Labour Participation Rate}=\frac{\text{Labour Force}}{\text{Population over 15 years old}}$$] --- ## Labour Force Participation - Even when population growth is small, it is possible to increase labour force participation. - for example by having **more working women**: East Asian Miracle in the 1990s was partly because increased women's participation in the economy. - More people going to the **universities** can also reduce labour participation rate for a while. - **Migration** changes population and labour force participation in both source region and receiving region. --- class: middle, center ## Indonesia's unemployment rate <!-- --> --- ## Indonesia's Unemployment rate - Indonesia had a very low unemployment rate during the 90s amid industrial expansion - The 1998 Asian Financial Crisis (AFC) took a big hit on unemployment rate - 2008 Global Financial Crisis (GFC) brings a lot of foreign investment, expanding the economy. --- ## Indonesia's employment conditions  .xs[Source: Data from Sakernas, 2009–16. Taken from Sarah Xua Dong and Chris Manning (2017) Labour-Market Developments at a Time of Heightened Uncertainty. Bulletin of Indonesian Economic Studies, 53:1, 1-25, DOI: 10.1080/00074918.2017.1326201] --- ## Regional unemployment rate - A quick, negative shock (like COVID-19) is stronger in a place where jobs are normally abundant. Source: [BPS](https://www.bps.go.id/indicator/6/543/1/tingkat-pengangguran-terbuka-menurut-provinsi.html) | Province | Feb 2020 | Aug 2020 | | --- | --- | --- | | DKI Jakarta | 5.15 | 10.95 | | Kep. Riau | 5.98 | 10.34 | | Jawa Barat | 7.71 | 10.46 | | Bali | 1.25 | 5.63 | | Maluku | 6.71 | 7.57 | | Papua Barat | 6.78 | 6.80 | | Kalimantan Utara | 5.71 | 4.97 | --- class: middle, center # Natural Rate of Unemployment --- ## Unemployment rate & Growth - It is intuitive to think that economic growth leads to lower unemployment rate. - When business cycle is peaking, more jobs are available. Thus lowering unemployment rate. - That is why you can name a law that improve business climate as "job creation law". - But can we have a booming economy to a point where unemployment rate = 0? -- - The answer is no --- ## Natural rate of unemployment - Indonesia's lowest unemployment was during the manufacturing boom in the early 1991 at 2.62%. - There are some reasons why we will never get unemployment to 0: + Structural change + Frictional unemployment + Structural unemployment --- ## Structural change - When the economy booms, usually only a certain jobs become available. - For example, the manufacturing boom in the 90s brought a lot of labour-intensive and engineering jobs. --- ## Indonesia's structural change  .xs[source: World Development Indicators] --- ## Indonesia's structural change  .xs[Source: Data from Sakernas, 2009–16. Taken from Sarah Xua Dong and Chris Manning (2017) Labour-Market Developments at a Time of Heightened Uncertainty. Bulletin of Indonesian Economic Studies, 53:1, 1-25, DOI: 10.1080/00074918.2017.1326201] --- ## Structural change - In the 2008, many investment goes to developing countries such as Indonesia. - These investments are coming to many services-related sectors, not so much on agricultural sector. - You might heard how many Indonesia's agricultural engineering graduates goes to the financial sectors. - A person who are already a farmer can not easily jump to non-farming jobs. --- ## Frictional unemployment - The graduates might take some times to do **job search**, and during this time, if that graduates is being surveyed, BPS will classify him/her as unemployed. - This is called frictional unemployment. - for example, an engineer graduates can easily join the online taxi wave, but one might skip that opportunity and keep searching for engineering jobs. --- ## Frictional unemployment - It is not bad, in fact it is actually good because it shows that people look for jobs best suited to them. - Good **job matching** is good for economy because it leads to efficiency. - Problem arise when it takes too long and too costly for a job search to match. --- ## Structural unemployment - Is when labour supply is persistently higher than available jobs. - Structural unemployment happens when the job market cannot clear. - This is due to a **price floor**-like effect which prevent wage to hit a **market clearing wage rate**. - this is not great as it introduces inefficiency. --- ## Structural unemployment <!-- --> --- ## Minimum wages - Minimum wage is mandated by the government to ensure a decent wage for all worker. - It has an opportunity cost: + potentially reduces work opportunity [(Suryahadi et al 2010)](https://www.tandfonline.com/doi/abs/10.1080/00074910302007) + people who are willing to work in a lower wage can't participate + it helps only people who are already working - Minimum wage can help in the situation where labour demand is concentrated on a small number of firms (employer has market power). --- ## Labour union - Labour union can have a similar effect to a minimum wage - Labour union allows for labours to act collectively, and negotiate a higher wage for the union members. (**collective bargaining**) - Collective bargaining gives labour market power, and can potentially be harmful for unemployed people. --- ## Efficiency wages - Firms may choose to pay **efficiency wage**, a wage that employers set above the equilibrium wage rate so employee has insentive to perform better. - For employers, sometimes having a smaller number of employee is better as long as they are perform. - This higher wage creates structural unemployment. --- ## The natural rate of unemployment - Is the level of unemployment that is rendered "natural" (since it won't get to zero) - Natural unemployment = frictional unemployment + structural unemployment. - Actual unemployment = natural unemployment + cyclical unemployment. - **Cyclical unemployment** is the deviation of the actual rate of unemployment from the natural rate because of economic cycle. --- ## The natural rate of unemployment - Knowing the level of the natural rate of unemployment is important to determine the state of the economy. - However, it is not always straight-forward: we don't always know what the natural rate of unemployment is and is always up to a debate. - Moreover, just because someone has a job does not mean the job is decent or secure. - A minimum wage too high can also incentivies **informal jobs** which has worse working condition compared to formal jobs. --- class: middle, center # inflation --- ## Inflation - A rise in price level is not necessarily bad, especially if wage level is also rises. - Economists often use the term 'real' to negates the impact of price level and wage level. - **real wage** is the level of wage divided by a price level, while **real income** is the level of income divided by a price level. - They show the most important things: how much goods and services you can get from working and earning money. --- ## Inflation - The rate at how fast the price increase can be a problem: that is, inflation. - remember the definition of inflation: .s[$$\text{inflation rate}=\frac{\text{Price index year 2 - Price index year 1}}{\text{Price index year 1}} \times 100\%$$] - There are problems with inflation that is too high. --- ## Cost associated with inflation - **menu cost**, is when firms need to change printed price on their menus or displays. - During the Brazilian inflation of the early 1990s, supermarket workers are reportedly spent half their time for changing price stickers. - **Unit-of-account cost** is a cost associated with unreliability of money. During a hyperinflation, it is common to ditch local currency and use US Dollar instead to buy and sell goods, like in Zimbabwe and Venezuela. - In the worst-case scenario, barter can even be an option. --- ## Winner and losers from inflation - The reason why inflation creates winners and losers is **long term contract**. - Many transactions are not made in a single day: for example, a loan. - In the case of loan, a borrower received a fixed amount of money today while having to return it with interest at a later time. - The contract is usually written in a **nominal interest rate** term. High inflation can reduces the actual **real interest rate**. - real interest rate = nominal interest rate - inflation. --- ## Winner and losers from inflation - Suppose Ann borrow 200.000.000 IDR from Bob with 10% interest rate: Ann will return 220.000.000 to Bob in a year time. Ann use the money to buy a car. - However, inflation is high: the next year's price of a car is actually 230.000.000 IDR, which is a 15% increase. - In this case, real interest rate = 10% - 15% = -5%: it is better for Bob to buy car instead of lending the money to Ann. - in other words, borrowers gain from inflation at the expense of lenders. --- ## Which inflation? - It is common to calculate inflation using local currency. - As an economic agent, we have expectation of the future and of the value of IDR. - If we expect an inflation, perhaps it is better to save in terms of other asset: real estate, stock, foreign exchange, gold, cryptos etc. - In the end, how much IDR we have is not the most important. The most important is how much things we can buy with thata amount of IDR. --- ## Inflation is hard - Inflation can be problematic because it is hard to bring down once it reach a high number. - Inflation can make a currency become too volatile and worthless as a unit of transaction. + especially if import is very high. - In general, a central bank and the government target inflation to be at 2%. --- <!-- --> --- ## Next week - We will learn more on economic growth. - We will look at the relationship between inflation, unemployment rate and economic growth.